John Taylor (of the famous Taylor Rule) has criticised Fed severely in this crisis.
It began with this paper presented in Kansas Fed Symposium in 2007 where he said Fed should have raised rates higher and faster in the period 2002-06 . This would have minimised the effects of the crisis.
He then presented another paper taking a critical review of Fed’s policies to pump liquidity in the system. He said the crisis was never really a liquidity problem but a solvency problem. The rates in money markets had risen not because of former but because of latter. Fed had got it wrong.
In the next paper he summarises the two above papers and also adds why initial fiscal stimulus die not work, Fed cut rates sharper than Taylor rule suggested etc. This paper was quoted quite a bit in the media.
Taylor has upped his criticism further calling Fed’s Monetary Policy as Mondustrial (Using Monetary Policy for Industrial Policy Goals). This was pointed in WSJ Blog and Taylor has written a new paper on the same which he sarcastically titles – The need to return to a monetary framework. In this Taylor says monetary policy is being used to help certain sectors and institutions which is the job of a industrial policy. He points to number of questions Fed should answer:
What justification is there for an independent government agency to engage in such industrial policy?
What is the role of District Bank presidents versus Board members in making such decisions?
How can one continue to apply the section 13(3) “unusual and exigent” clause of the Federal Reserve Act when firms and people assisted can get credit but at a rate that seems too high?
Will such interventions only take place in recessions, or will Fed officials use them in the future to try to make economic expansions stronger or to assist certain sectors and industries for other reasons?
Very important questions all of them. Like I have said in numeorus posts – central bankers have a long way to go. The crisis will (should) end in sometime but then will begin a series of questions.